Commercial tenants typically pay a monthly rent for leased space for offices or the like based on the square footage of the space. Landlords typically calculate commercial office rental rates based on taxes, operating expenses, debt service, tenant construction costs, marketing costs and profit (or return on landlord investment). Landlords evaluate these costs on a per-square-foot basis. The only part of the rent a tenant typically can negotiates the profit segment, which is usually 5% to 15% of the total rental rate because all of the other landlord expenses listed above are predominantly fixed. By reducing the amount of space required by a tenant, however, the effect is cost reduction on the entire rent, not just the profit portion. A tenant may thus realize substantial rent savings if they reduce the space they lease by identifying and eliminating areas in their space that are not needed or can be downsized, reducing inefficient architectural designs and avoiding buildings that have characteristics that prevent the most efficient use of space.
In view of the above, it is becoming increasingly important for tenants to accurately determine the amount of leased space that they actually require so design and architectural inefficiencies can be identified and eliminated. Real estate leasing firms, brokers and professional licensed architects predominantly use a multiplier to calculate space requirements. For example, the multiplier could be 200 square feet per person so that a company with 50 people would have a projected requirement of 10,000 square feet. But some companies need more space per person because of the size and mix of executive offices and workstations. For example, attorneys and accountants may need 250-300 square feet per person because they typically use a higher ratio of offices to cubicles. Insurance companies and software consultants, however, typically use more cubicles than offices and may need only 150 square feet per person.
As such, real estate leasing firms and architectural firms may increase or decrease the rule of thumb to be industry specific. However, even when adjusting the rule of thumb for different industries, the professionals typically don't consider that every company has its own distinct space requirements. An analysis of the needs of two companies with similar revenues in the same industry may provide two very different results. For example, one company might want a twenty-person boardroom while the other wants a twelve-person conference room. One may decide a 6′×6′ cube is big enough for employees while the other will opt for 8′×8′ workstations (almost double the space). One president might want a modest 12′×15′ office, the other a 20′×30′ oasis with a private washroom and a wet bar. Companies may also have their own set of workspace standards, which can vary as much as 75% across an industry. Despite this variety of needs from company to company, brokers and architectural firms typically still use the antiquated ‘rule of thumb’ multiplier approach to estimate space requirements, which often leads to considerable over-sizing of the tenant's space.
Office buildings often feature characteristics which reduce the amount of actual usable square footage and, in turn, increase the amount of space tenants will need to lease. More specifically, because of numerous factors, the space efficiency of buildings varies greatly. Columns, HVAC apparatus, building loss (or “add on”) factors and unusual building shapes (curved sides and any angles other than 90°) increase space inefficiency and are all elements that can vary greatly from building to building. As a result, the actual usable space that is available to a tenant is actually less than the amount advertised by the landlord. Because of these varying inefficiencies from building to building, an office user might find that they require 10,000 square feet in one building and 11,000 square feet in another less efficient building. By understanding this “space efficiency” concept, a tenant can realize substantial rent savings.
Additionally, a tenant may also be required to lease more space than necessary because the architect, designer or space planner (collectively referred to as “Space Planner”) did not fit the user's requirements into the subject space as efficiently as possible. Although it could be argued that the Space Planner might do this intentionally to increase the amount of their bill (Space Planners are typically bill by the square foot, not the hour), it could also be for other reasons. For example, the Space Planner might not understand the impact that an additional 5% or 10% in office space has on the tenant's occupancy costs. On a ten-year lease, an additional 10% in office space would mean an addition $600,000 in rent to a 20,000 square foot user ($30 per foot rental rate).
Another reason a Space Planner may not lay out space as efficiency as possible might be that they lack knowledge and education on the subject. A search was conducted on the course description web site pages at 25 top United States architectural schools. The keywords used in the search were ‘space efficiency’ and only one course was located in the 25 school search, indicating the architectural schools in the United States have a greater emphasis on aesthetic design than they do on space efficiency. Therefore, the lack of attention to efficient space design by Space Planners in the United States may simply beta result of lack of education on the subject.
An office space tenant may also find that technological advances contribute to leasing too much space. For example, a tenant might have needed 500 square feet for their filing when they signed their previous lease. Today, with the ability to store documents digitally, that same tenant might only require 200 square feet for their files. By the same token, the reduction in the size of computer processors might have the same effect on the size of that tenant's computer room.
Other miscellaneous factors might also contribute to over-sizing of office space. A company's standard office sizes may change during the course of an office lease and now dictate that an employee that once had a 15′×20′ office should now be in a 15′×15′ office. In some cases, the company may have accepted the larger office at their lease inception because it was left from the previous tenant and the tenant wanted to reduce the amount of construction that needed to be done.
It may be argued that any one of the causes that result in inefficient space leasing may be, at least partially, evident to a typical tenant. However, it would be not only be very difficult for someone not experienced in the industry to identify the full inefficiency impact of any one particular cause, but it would be virtually impossible for them to accurately estimate the total loss for all inefficiencies without the knowledge and tools necessary to calculate the losses.
When a tenant is considering the potential relocation of their office space, the option of remaining in their current space typically has a monetary advantage. This is because the cost to move the office is not only time intensive but expensive as well. Additionally, there is often the need to perform construction to modify a second generation space so it meets the needs of the new tenant. Alternatively, the tenant may consider moving into raw space that has never been occupied before, in which case a full build out of the space will be required. Either of these options will require an investment of construction dollars that are typically either greatly reduced or eliminated if the tenant elects to stay in their current location.
Because of the construction expense and other relocation costs related to moving, the tenant would generally opt to stay in their current location to minimize cost. If all else were equal, there would need to be a compelling financial reason for the tenant to move. Because office buildings are generally leased or sold based on the square footage used, the opportunity to move into less, more efficient space would offset some of the up front expenses of relocation. However, unless a tenant could accurately project the amount of space required if all efficiency tactics were implemented, they may underestimate the potential savings from moving into more efficient space and decide not to relocate based on inaccurate information.
Therefore, there exists a need for a tenant to be able to identify the inefficiencies in their current leased office space and project the amount of space they should require (and potential occupancy cost reduction) if all or any one of the inefficiencies were eliminated.